Euro Crisis Shifts to Spain as Merkel Faces G-20 Pressure

A Caja Madrid bank branch, part of the Bankia group, was vandalized during a protest against Spanish banks in Madrid on June 16, 2012. Spain's bond yields surged the most since the euro was created in 1999 this week after the nation requested aid for its banks and asked the European Central Bank for more financial support. Photographer: Angel Navarrete/Bloomberg

June 19 (Bloomberg) -- Group of 20 leaders focused their
response to Europe’s financial crisis on stabilizing the
region’s banks, raising pressure on German Chancellor Angela
Merkel to expand rescue measures as contagion engulfed Spain.

As U.S. President Barack Obama called after-dinner talks
with euro-area leaders at the G-20 summit in Mexico, the
Treasury department’s top international negotiator, Lael
Brainard, said Europe is making an effort to “break the
feedback loop” between banks and government debt, the link that
is worsening Spain’s woes.

“We’re seeing a notable shift in European discussion”
toward spurring economic growth and “laying out a path to
financial union,” Brainard told reporters as the two-day summit
began at the resort of Los Cabos.

G-20 chiefs met as Spain’s borrowing costs soared to a
euro-era record and elections in Greece failed to damp the
threat of contagion. Merkel, who heads Europe’s largest economy
and rejects pooling euro-area debt or boosting deficit spending,
said she’ll defend her policies with “good arguments” as world
leaders press Europe to stamp out the debt crisis now in its
third year. Obama has blamed the crisis for slowing U.S.
employment growth.

The euro-area’s G-20 governments -- Germany, France and
Italy will commit to protecting the currency union, according to
an excerpt of a draft of the statement that leaders will issue
at the end of the summit.

Integrity, Stability

Euro-area members “will take all necessary policy measures
to safeguard the integrity and stability of the area, improve
financial markets and break the feedback loop between sovereigns
and banks,” according to the draft provided by an official from
a G-20 government who declined to be identified because the
statement is not yet public.

With European Union leaders preparing to discuss paths to
closer political and economic union at a summit in Brussels on
June 28-29, Merkel has distanced herself from aspects of the
EU’s proposal for a banking union. She said last week that steps
such as jointly insuring deposits and joint euro-area bonds
can’t replace budget discipline and raising competitiveness
across the euro area.

“It’s not a complete beating up session, but Germany is
the recipient of fairly caustic criticism from other members of
the G-20,” Rob Carnell, chief international economist at ING
Bank NV in London, said by telephone. “The pressure will be on
Germany to give more ground and behind closed doors Merkel may
well be more accommodative.”

IMF Resources

As part of the crisis toolkit, the world’s largest emerging
economies are announcing contributions to the International
Monetary Fund’s financial firewall at the meeting, beginning
with $10 billion pledges from both Russia and India. Brazil’s
Finance Minister Guido Mantega said He called for a “change of
direction” in crisis-fighting, saying that the antidote “goes
beyond the measures that are being adopted” by Europe.

“There is concern that the firewall available may not be
adequate to deal with contagion,” said Indian Prime Minister
Manmohan Singh. “The resources currently expected to be
mobilized by Europe and the IMF are less than was estimated a
year ago, and the crisis is actually more serious.”

The euro extended a decline yesterday, falling 0.5 percent
to $1.2576, as Spanish 10-year bond yields leapt above the 7
percent level that forced Greece, Ireland and Portugal to call
for sovereign rescues. That stoked speculation that Spain may
need to call for a sovereign bailout after the government called
for as much as 100 billion euros ($126 billion) to shore up its
blighted banks.

ECB Action

The European Central Bank can stop the debt crisis in the
17-nation euro region “almost immediately” with “massive”
government-bond purchases, Guillermo Ortiz, the chairman of
Grupo Financiero Banorte SAB and Mexico’s former central bank
governor, said in an interview in Los Cabos. The ECB “has done
quite a bit,” Ortiz said. “The problem is it needs to do
more.”

G-20 leaders are in Los Cabos for their second consecutive
summit to be dominated by the crisis. Spain’s Prime Minister
Mariano Rajoy is also attending the talks, as the respite in
markets after a victory for the pro-bailout New Democracy party
in Greek elections on June 17 proved short-lived.

Merkel damped speculation that the terms of Greece’s
bailout might be relaxed.

“The important thing is that the new government sticks
with the commitments that have been made,” Merkel told
reporters. “There can be no loosening on these reform steps.”

China, Indonesia

China and Indonesia set the tone of the meeting by
signaling growing exasperation with more than two years of
European crisis-fighting that has failed to stem the threat of
global contagion.

Even as Obama said that now is the time “to make sure that
all of us do what’s necessary to stabilize the world financial
system,” European leaders pushed back, saying they alone are
not responsible for the slowing global recovery.

No one thinks the EU “is the only source of the problem,”
said Italian Prime Minister Mario Monti. The crisis “had its
origins in imbalances in other countries, including the U.S.”

EU Commission President Jose Manuel Barroso, challenged at
a press briefing in Mexico on Europe’s credibility during the
crisis, said its leaders had “not come here to receive lessons
in terms of democracy or in terms of how to handle the
economy.”

Merkel, Monti, Rajoy and French President Francois
Hollande, the heads of the four biggest euro economies, next
meet in Rome on June 22, before the full EU summit in Brussels.

Leaders will pledge “to mobilize all levers and
instruments” to ensure financial stability and tackle the
crisis, according to draft conclusions.

“Today has been a difficult day,” Spain’s Economy
Minister Luis de Guindos said in Los Cabos. “Spain is a solvent
country,” he said. “The current situation of market
penalization doesn’t reflect the efforts and the potential of
the Spanish economy.”